Directors’ and Officers’ Liability Insurance (D&O) How Much is Enough?
This is a great question but, unfortunately, it is not an easy answer. So my advice is to start (or more likely, keep) the ball rolling. Insurance quotes are free (with the exception of Representations and Warranties Insurance and some products that border on financial guarantees, but I could at least get you rough non-binding estimates), so investigate and document everything. This creates two big positives, 1) see the quotation process for its loss control value and you will automatically bolster your enterprise risk management function, and 2) you will create the base for some future defence based on Due Diligence or The Business Judgement Rule (you won’t be able to rely on either of these without documentation.)
Examine your budget, because you probably can’t afford to pay for ‘enough’ insurance for all parties and all matters and still remain profitable, but knowing what you can’t afford allows you to direct your realistic insurance premium budget to your highest priorities. If you think you can afford ‘enough’ insurance, call me, I would be happy to help you buy it.
Determine your priorities. With fifteen years experience I am confident saying that determining priorities for D&O is one of the least often conducted or documented exercises in the overall risk management and insurance buying function. The most important priority, establish who the policy is being purchased for:
- Personal Assets of individual Directors and Officers based on their personal liability,
- The Corporate Entity, but only for where it indemnifies individual Directors and Officers for their personal liability,
- The Corporate Entity, for as many exposures and as much money as can be negotiated,
If the answer is all three, then there is a chance no one is happy. What might be considered a very large policy limit to an individual director might not be material to protect the assets of the corporation, but the corporate loss could exhaust the policy before the director’s loss is paid.
Quick (documented) calculations are better than no calculation at all. If you have not done these yet, make fast assumptions of the following, then follow-up with accounting, HR, legal, etc. to determined actual amounts and other criteria:
- Statutory remittances for the year (CPP, EI, and all Tax), and take a worst case scenario of potential arrears (even with monthly remittance contracted to outsourced experts, 4-6 months could easily happen, especially if the underlying cause is financial misstatement and/or fraud.)
- Market capitalization burn-layer. For example 52 wk stock price hi minus low times the number of shares held at arms-length time 20%. This is just a number, and not specific to your company or to industry statistics. There are many companies who are ready and willing to charge you for securities litigation exposure modelling, and I urge you to use them (at lease in an effort to CMA.) But, this number is still better than not considering the exposure at all. An important CYB.
- Debt. Very difficult to determine potential exposure from these stakeholders, and no simple calculation, but if there has been a lot of unsecured debt issued in a corresponding period of financial downturn, I suggest some number be included.
- Employment – if there have been a large number of lay-offs, or if you have a large number of employees where their job description or function is split between management and employee activities, put at least a few million here.
- Benchmarking – at least for limits of liability, premium and deductible; pick three or four publicly traded competitors, or firms in your industry or of similar size, and go online to Sedar.com, access their management information circular, do a word search for ‘officers’ insurance’ , usually near governance or compensation, and see if they report their D&O numbers. But, keep in mind, if they are part of a conglomerate they may be sharing those policy limits with far more parties and matters/exposures than you might think, and reporting only their allocated portion of the premium. Also, this analysis does not provide any details on the type of coverage, how many enhancements or exclusions there are, or what continuity of coverage the policy provides. There is plenty of data in the marketplace available to further support benchmarking functions.
- Defence Costs – Consider at least a few million dollars for any public company, and if you are inter-listed in the US (even the smallest) consider $10 million
Please note there is considerably more exposure criteria to consider, this is only a starting point. There is also a lot of resources, tools, third party advice, modeling, etc. available to insurance purchasers.
Research claims examples, and learn from them. If all you find is Nortel, keep digging, there are lots, and many that relevant to your operations, industry, ownership structure or size. It is very difficult to search for litigation in Canada, because there is no central online database. But most law firm websites offer the cases they are, or have been, involved with (especially the plaintiff focused ones, classaction.ca (siskinds), kimorr.ca, strosbergco.com, etc.). You can also use a US database like securities.stanford.edu and search for Canada or provincial cases. And, the Canadian Bar Association has set up a National Class Action Database, but it is voluntary and the search function doesn’t work very well.
Know what you are buying. There are many more topics related to the D&O insurance policy that should be reviewed in detail, including, but not limited to Allocation of Loss and Costs, Continuity of Coverage, Indemnification and Presumptive Indemnification, Limits Sharing, Limits Exhaustion, Deductible v Retention, Severability, Exclusions and where to find them, Applications and Warranty Statements, Notice Provisions, Discovery, Extended Reporting Provisions and Run-off. I hope to cover all of this material and more in blog posting and website resources, but if you cannot wait that long, please don’t hesitate to call me with any questions.
Thank you for reading,
Greg Shields, Partner
Mitchell Sandham Insurance Brokers
The views expressed above are those of the author and may not reflect the views of the company, its employees or clients. No quotation from this site should be used in any manner without the prior written consent of the author, and any such quote should give credit to the author and the blog. The comments do not take into consideration any circumstances specific to any organization, and legal or insurance advice should be obtained from your lawyer or broker.